TMI Blog2017 (3) TMI 1748X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT (A) not adjudicated the ground of appeal raised before him. It was further argued in alternative that M/s Satyam and Compaq are well established company in the field of software services and question of their dependent upon the assessee does not arise - HELD THAT:- CIT(A) has not adjudicate the ground of appeal despite specific ground of appeal raised by assessee. Hence, we deem it appropriate to restore this ground of appeal to the file of ld CIT(A) to decide the issue afresh in accordance with law. Penalty levied u/s 271(1)(c) - HELD THAT:- We have granted full relief to the assessee as holding that consideration received for software licence/sublicence is not royalty. As in the quantum assessment, the treatment of the income has been reversed; consequently the disallowance in the assessment order is deleted. Thus, the appeal filed by Revenue even on merit left no merit for further consideration. Because, as the order on the basis of which the penalty was levied has been set-aside by us. Even otherwise the penalty was levied by AO on account of different treatment besides claimed by the assessee. It is the settled law that mere disallowance of claim which is based on bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usive right to use, develop and enjoy the Intangible property rights to the computer software from M/s i2 Technologies (Cayman Island) Ltd. The assessee filed return of income for relevant assessment year on 17 February 2004 declaring total income of ₹ 3,88,23,854/-. In the return of income the assessee claimed that ₹ 1,28,89,958/- was received on account of licence fee for the sale of software which is not taxable in India. The contention of assessee was not accepted by AO and treated the said income as royalty and brought the same as taxable income of assessee in India. The AO further concluded that out the said income, the income on account of licence fee of software to M/s Agrotech Foods Ltd of ₹ 32,27,028/- is a direct sale and Income on licence fee to M/s Compaq Computer (India) for ₹ 73,27,586/- and to M/s Satyam Computer Services for ₹ 32,35,344/- are value added retail(VAR). The VARs sold these software to Premiere Instrument Controls Ltd and Maruti Udyog Ltd and the receipt was not offered to tax by assessee on the ground the transaction are in the nature of copyrighted product rather than copyright article. The AO held that they are de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support of his argument they learned counsel for assessee relied upon the decision of Hon ble Delhi High Court in case of CIT Versus Infrasoft Ltd[2013] 220 taxman 273, decisions of Mumbai Tribunal in ADIT Versus Ban Global B.V. [2016] 49 ITR(T) 73, Qad Europe BV Versus DCIT 53 ITR(T) 259, ADIT Vs First Advantage Private Limited[2017] 77 taxman.com 195, Galatea Ltd. v/s. DCIT(IT) [2016] 46 ITR (T) 690, International Ltd. vs. ADIT(IT) [2016] 68 taxman.com 97, Reliance Industries Ltd. [2016] 69 taxman.com 311, [2011] 16 taxman.com 371, Solid Works Corporation [2012] 51 SOT 34, Software System (P.) Ltd. v/s DCIT/ACIT [2014] 47 taxman.com 140, Antwerp Diamond Bank NV Engineering Centre [2014] 65 SOT 23, Inc. v/s. ADIT [2015] 61 taxman.com 36, Team Telecom International (P.) Ltd. [2011] 12 ITR (T) 688 and ADIT(IT) v/s. Colgate Palmolive Marketing SDN BHD [ITA Nos. 2129-2130/8311/Mum/04/; ITA No. 2639/5794/5423/Mum/2006, ITA No. 5920/Mum/2007]. On the other hand the learned DR for the Revenue supported the order of authority below. The learned DR for the Revenue further argued that the Hon ble Delhi High Court and various Tribunals have examined the issue of royalty only under clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2010] 125 ITD 263 (Chennai) (SB). 5. We have considered the rival contention of the parties and have gone through the orders of authorities below. During the assessment, the AO asked the assessee to justify the claim of non-taxability of license fees of ₹ 1,28,89,958/-. The assessee filed its detailed reply dated 07.03.3003. The AO observed that Satyam Computer Services Ltd. and Compaq Computer (India) Pvt. Ltd. acted as Value Added Reseller (VAR) for Premium Instruction and Control Ltd. (PRICOL) and Maruti Udyog Ltd. Satyam Computer Services Ltd. and Compaq Computer (India) Pvt. Ltd. which acted as VAR for assessee which are not in the business of selling the license software to the end user but for the assessee-company and were treated as agents of assessee and thus the assessee forms a permanent establishment through its agent. Thus, the amount received from Satyam Computer Services Ltd. amounting to ₹ 1,23,35,344/- and ₹ 73,27,586/- respectively was taxed as royalty income as per the provision of section 44D of the Act. The AO further observed that assessee-company entered into agreement with M/s Agrotech Food Ltd. wherein the license is sold direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the programme. But the moment copies are made and marketed, it becomes goods which are susceptible to sales tax. Even intellectual property' once it is put on to a media, whether it be in the form of books or canvas (In case of painting) or computer discs or cassettes and marketed would become goods . There is no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film in a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for, purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. The software itself, i.e. the physical copy, is not merely a right or an idea to be comprehended by the understanding. 83. It has been further held that the purchaser of computer software neither desires nor receives mere knowledge, but rather receives a certain ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in physical form on some tangible object somewhere. In sum, once the information or knowledge is transformed into physical existence and recorded in physical form, it is corporeal property. The physical recordation of this software is not an incorporeal right to be comprehended. 84. To further elucidate the nature of the transaction in the case of the Assessee it is necessary to examine some of the clauses of the Licensing software agreement entered into by the Assessee with its customers: INFRASOFT LICENCE AGREEMENT. 2. GRANT, SUPPLY AND USE OF LICENCE (a) Infrasoft grants Licensee a non-exclusive, non-transferable licence to use the software in accordance with this Agreement and the Infrasoft Licence Schedule. The licence is perpetual unless identified as being for a specified term in the Infrasoft Licence Schedule. (b) Any third party software incorporated in the software is licensed only for use with the software. (c) Infrasoft will supply one copy of the software for each site and, when applicable, one set of support information to the Licensee. Licensee shall pay Infrasoft a fee for additional copies of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce fees are exclusive of and net of any taxes, duties or other such additional sums including, but without prejudice to the foregoing generality, value added/purchase tax, excise tax (tax on sales, property or use), import or other duties and whether levied in respect of this Agreement, the Software its use or otherwise. All such taxes shall be the responsibility of the Licensee and shall be payable in addition to the licence fee. (c) Infrasoft advises the Licensee that the Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. 4. ** ** ** 5. OWNERSHIP, INTELLECTUAL PROPERTY AND INDEMNITY (a) All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. Infrasoft warrants that it has the power to grant the licence rights contained in this Agreement. 85. The Licensing Agreement shows that the license is non-exclusive, non-transferable and 81. The Supreme Court in TAta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r software‟ will have to be included in the term literary work‟ but to constitute royalty‟ under the treaty, the consideration should have been paid for the use of or the right to use the copyright in the literary work‟ and not the literary work‟ itself. 42. Further, when we read the definition of copyright and literary work as provided in the Copyright Act, 1957, it is also important to note down that what constitutes infringement of copyright and what are the exceptions to it. If the software purchased by the assessee and the use of it by the assessee is covered within the exceptions as provided under section 52 of the Copyright Act, then in that event it cannot be said that the transfer of right to use or for use of the copyright has passed. The proviso to section 57 of the Copyright Act has further clarified that the author of the work shall not have right to restrain or claim damages in respect of any adaptation of a computer programme to which clause (aa) of sub section (1) of section 52 applies. 43. Further in case of imported software i.e. if the original work has been published outside India, as per the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... automatically or impliedly, so far as the Indian copyright laws are concerned. 44. Hence, while interpreting the definition of royalty as provided in the DTAA, it is to be seen as to what has been purchased by the assessee i.e. whether the copyright itself has been purchased or what the assessee has purchased is only a copyrighted work . It is also required to be analysed as to whether the use of such right would amount to infringement of copyright if a license or permission in this respect is not given by the owner; and when assessee has purchased a copyrighted product, whether the use of the same for the business purpose of the assessee is covered within the exceptions as provided under section 52 of the Copyright Act. Further, in case of imported work/product, whether the protection of copyright is available to the foreign author in terms of section 40,40A, 41 and 42 of the Copyright Act 1957. 45. The provisions of the Copyright Act, as discussed above are clear and unambiguous in this respect. If the assessee has purchased a copy of a computer software programme and he uses the said copy for his business purpose and if the said use falls within the scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the same may be subject matter in other laws such as Indian Contract Act 1872 , Sale of goods Act 1930 or the Consumer Protection Act 1986 etc., but, the same in any way cannot be said to grant of or infringement of copyright in the light of specific statutory provisions of Copyright Act 1957. 46. While finalizing this order, we have come across a recent decision of the Co-ordinate Delhi Bench of the Tribunal in the case of Datamine International Ltd. vs. ADIT in ITA No.5651/Del/2010 vide order dated 14.03.16 on the identical issue wherein the definition of royalty vis- -vis computer software in the light of India UK Treaty has been discussed. The Tribunal in para 12.1 of the said order(supra) has observed that in the India-UK Treaty, in para 3(a) of Article 13 which deals with the definition of royalty in the relevant India-UK Treaty, there was no specific mention of word computer software along with other terms such as literary, artistic or scientific work, patent, trade mark etc. The Tribunal observed that such a language of the India-UK DTAA was in sharp contrast to the specific use of the term computer software or computer software programme together wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries and the same are to be read as such. We, therefore, fully agree with the observations of the co-ordinate bench of the Tribunal in the case of Datamine International Ltd. vs. ADIT (supra) that wherever the Government of India intended to include consideration for the use of software as 'Royalties', it explicitly provided so in the DTAA with the concerned country viz. Malaysia, Kazakhstan and Turkmenistan. We find that in the cases before us, in the DTAA of India with respective countries (names mentioned in the chart given above), the definition of royalty in none of the respective treaties specifically include any consideration for the use of or the right to use any computer software and therefore, the same cannot be imported or read into it. 48. We may further clarify here that without expressing our opinion or any view in relation to the definition of royalty vis- -vis computer software as provided under the Income Tax Act, we have given our findings only in respect of the scope of royality under the DTAA. 49. In view of our detailed discussion made above, the assessee cannot be said to have paid the consideration for use of or the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, at this stage, has raised another important argument. He has submitted that the purchase orders for the softwares were made much prior to the year 2012. The dates of purchase orders have been mentioned in the 4th column of the table drawn in initial paras of this order. He has submitted that explanation 4 to section 9(1)(vi) has been inserted by Finance Act, 2012 with retrospective effect 01.06.1976, vide which the right for use or right to use a computer software including granting of license has been included in the definition of the term right, property or information, the consideration paid for which has been deemed to be income by royalty under section 9(1)(vi) of the Act. He has stated that the said explanation though preceded with the phrase it is hereby clarified and is followed by the words includes and has always included yet the said explanation cannot be applied retrospectively. He has stated that vide said explanation, computer software has been specifically added into the definition of right, property or information. However, prior to the insertion of explanation 4 to section 9(1)(vi), no such interpretation as has ever been done by any court of law to include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw. (c) That the assessee has purchased a copyrighted article and not the copyright. There is no transfer of any part of copyright (d) As what is paid is not royalty under the Indo-US DTAA, and as it is covered Article 7, which deals with Business Profit and as the foreign party does not have Permanent Establishment in India, the same is not taxable in India and the assessee is not required to deduct tax at source from the said payment. (e) The present computer software cannot be treated as a patent or an invention. 52. The ld. AR has further relied in this respect on the decision of the Hon ble Supreme Court in the case of Sedco Forex International Drill INC. Others vs. Commissioner of Income Tax another (2005) 199 CTR (SC) 320 and also of the co-ordinate bench of the Tribunal in the case of Rich Graviss Products (P.) Ltd. vs. ACIT (2014) 49 taxman.com 531 (Mum-Trib.). He has also relied upon the decision of the co-ordinate bench of the Tribunal in the case of JM Morgan Stanley Securities Pvt. Ltd. vs. ACIT in ITA No.6340/M/2004 decided vide order dated 05.03.2007 wherein the Tribunal has taken a view that wherein an earlier case a specific view has been tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xisting law which was in operation at the time of purchase of software, the assessee was under the bonafide belief that there was no liability to deduct tax in respect of the consideration paid for the said purchase of software. It may be further observed that as the definition as was in existence before the insertion of Explanation 4, there was a remote possibility to give a broad interpretation to the definition of right, property or information so as to include the right to use or right for use of the software in the said definition. The Explanation 4 has brought and added a further meaning to the provision which was not supposed to be foreseen by the assessee. The co-ordinate bench of the Tribunal in the case of Rich Graviss Products (P.) Ltd. vs. ACIT (supra), while relying upon various other decisions of the Tribunal, has held that the disallowance cannot be made under section 40(a)(ia) on the basis of a subsequent amendment brought into the Act with retrospective effect. In view of this, even otherwise, the Explanation 4 inserted vide Finance Act, 2012 cannot be applied retrospectively to the case of the assessee as the said Explanation 4 has the effect of change in law and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This appeal is filed by Revenue against deletion of penalty levied u/s 271(1)(c) of the Act. 10. Brief facts of the case are that the assessee in the return of income claimed ₹ 1,28,89,958/- was received on account of licence fee for the sale of software and the same is not taxable in India. The contention of assessee was not accepted by AO and treated the income as royalty and brought the same as taxable income in India. The AO further concluded that out the said income, the income on account of licence fee of software to M/s Agrotech Foods Ltd of ₹ 32,27,028/- is a direct sale and Income on licence fee to M/s Compaq Computer (India) for ₹ 73,27,586/- and to M/s Satyam Computer Services for ₹ 32,35,344/- are value added retail(VAR). The VARs sold these software to Premiere Instrument Controls Ltd and Maruti Udyog Ltd and the receipt was not offered to tax by assessee on the ground the transaction are in the nature of copyrighted product rather than copyright article. The AO held that M/s Satyam and Compaq is depending agent of the assessee and accordingly taxed the receipt u/s 44AD. On appeal before ld CIT(A) the income received on account of d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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